While the bulls and bears duke it out, you can sit ringside and win with one of the best funds that leverage volatility.
To say the least, it would be risky to make a short-term bet either way right now that the stock market will move in a decidedly positive direction or a negative one. But you could make a strong case for both by betting on volatility.
The bulls are looking for a buy-on-the-dip opportunity and the bears are cutting long positions and adding to shorts. The best funds to take advantage of the fast and furious swings in stock prices will be those that perform best when volatility is at its greatest.
In January, the CBO S&P 500 Volatility Index (INDEXCBOE:VIX) moved above its historical mean of 20 and has been bouncing around a range between 16 and 22.
Whether you want to profit from volatility or simply add some diversity to your portfolio, here are three of the best funds to do the job.
3 Best Funds to Leverage Volatility: ProShares VIX Short-Term Futures (NYSEARCA:VIXY)
A good way to take advantage of short-term market fluctuations is with an ETF like ProShares VIX Short-Term Futures (NYSEARCA:VIXY).
VIXY tracks the performance of the S&P 500 VIX Short-Term Futures Index, which brings up an important point for investors not familiar with it. There can be differences between the actual movements of the VIX and the movements of VIX futures contracts. The CBOE Volatility Index, or “spot VIX”, is not directly investable and it reflects expected volatility of the S&P 500.
However, short-term futures contracts will reflect expected values of the VIX at the respective expiration dates of the contracts. None of the options, futures or ETNs linked to the VIX offer exposure to changes in the spot price of the index.
Also, the VIX Index tends to be mean-reverting, with the long-term average around 20. Therefore VIX futures prices often are higher than the VIX Index at times when the VIX is at relatively low levels, and vice versa.
With that said, recent short-term performance for the ProShares VIX Short-Term Futures fund is highlighted by a January price gain of 16.9%, which beats 82% of funds in the volatility category.
The expense ratio for VIXY is 0.83%, which is $83 for every $10,000 invested.
3 Best Funds to Leverage Volatility: iPath S&P 500 VIX ST Futures (NYSEARCA:VXX)
If you are looking for an ETN that profits from volatility, iPath S&P 500 VIX ST Futures (NYSEARCA:VXX) is worth considering.
This fund also tracks the S&P 500 VIX Short-Term Futures Index but sometimes ETNs can have smaller tracking errors than other fund types.
Short-term VIX ETNs, which generally establish long positions in the first and second month VIX contracts on a rolling basis, will often move in line with the spot VIX — at least in the short term.
For example, the year-to-date price gain of 6% beats 99% of other volatility funds. It also smashes the near-zero price gain of the S&P 500 thus far in 2015. The three-month performance of 15% is also ahead of 99% of other volatility funds.
The expense ratio for VXX is 0.89%, which is $89 for every $10,000 invested.
3 Best Funds to Leverage Volatility: Velocity Shares VIX ST (NASDAQ:VIIX)
The Velocity Shares VIX ST (NASDAQ:VIIX) is another ETN that does a good job of tracking the short-term volatility of the S&P 500 Index.
Issued by Credit Suisse Group (NYSE:CS), the price performance for VIIX for the week, month and three-month periods all rank in the top quartile of volatility funds.
The expense ratio for VIIX is 0.89% or $89 for every $10,000 invested.
As a final note of caution to potential investors of ETFs and ETNs tracking the VIX: these securities are intended to be trading tools for sophisticated investors who understand the potential consequences of investing in a volatility index.
They are most appropriately used as short-term tools to leverage equity price volatility. For reference, a typical volatility fund has a five-year annualized return of -41.9%, whereas the S&P 500 Index has a five-year return of 15.7%.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.